      Musings on Markets · 2025-06-02
      · 367d
    

Sovereign Ratings, Default Risk and Markets: The Moody's Downgrade Aftermath

This article analyzes the May 2025 Moody's downgrade of the US from Aaa to Aa1, placing it alongside previous downgrades by S&P (2011) and Fitch (2023). The author examines sovereign default history, consequences, and rating methodologies to assess the global implications of the US ratings downgrade on equity and bond valuations.

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Metrics in this report

Banking Crisis Probability

14%

absolute rate

countries with history of default (1975-2000 sample of 149 countries)

Banking Crisis Probability Increase

11percentage points

differential

defaulting vs non-defaulting countries

Bilateral Trade Decline Post-Default

8%

point estimate

effects lasting up to 15 years

Borrowing Cost Increase Post-Default

0.5-1.0%

range

defaulting countries relative to non-defaulters

Countries Added to Ratings List

34count

total

period 1985-1994, many with speculative ratings

Countries Rated by Moody's

143count

as of 2024

covering 75% of emerging markets and nearly all developed markets

Finance Executive Change Probability Increase

64%

increase

finance minister/central bank head after sharp devaluation (1971-2003)

Governments with Moody's Ratings by 1929

50count

approximately

central governments rated by 1929

Governments with Ratings in Early 1980s

13count

approximately

mostly developed and mature markets, mostly Aaa rated

Leadership Change Probability Increase

45%

increase

top leader (PM/President) after sharp devaluation (1971-2003)

Real GDP Decline Post-Default

0.5-2%

range

first year after sovereign default

Sovereign Rating Reduction Post-Default

1-2notches

median

countries that defaulted since 1970 vs similar non-defaulters